Just like regular puts, debit put spreads can be in the money (ITM), at the money (ATM) and out of the money (OTM) depending on the strike prices relative to the security’s current price. Here we are going to examine four different debit put spreads for SPY with August expiration date. SPY is currently trading at 161.28. The 167/164 and 165/162 spreads are in the money since both the long and short options have strike prices above the current price. The 163/160 spread is at the money since the long option’s strike price is above the current price and the short option’s strike price is below the current price. The 161/158 put spread is out of the money since both strike prices are below the current price. All spreads are 3 point wide. What I am interested is to find out how the strike prices affect the maximum profit, the breakeven point and the maximum loss. I also want to know the probabilities associated with the maximum profit, breakeven point and maximum loss. The table below shows the data I calculated and used and the chart summarizes the results. The table and the chart clearly shows that in the money debit spreads have much higher probability and even if the stock moves against you, you can still make money. You don’t have to be bearish to use this strategy. In the money debit spreads work well in neutral market conditions.

Here's a shortcut you can use to calculate risk/reward and probabilities:

If you have a 10 wide debit spread that you pay 6.00 for, you are risking 6 to make 4. You have *roughly* a 60% chance of breaking even on the trade.

On the credit spread side, it works the same. If you sell the 10 wide spread for 4, you risk 6 (the margin requirement aka max loss) to make/keep the 4. And your probabilities are roughly the same.

The unintuitive thing about this is if you try to give yourself a better probability, the risk/reward cost will be higher. If you sell a 10 wide spread for .50 (~95% probability), you are risking 9.50 to make .50. And as "improbable" as it is, it will eventually catch up with you.